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Consolidated performance snapshot: For Q1FY2016, KDDL’s top-line grew at 17.9% YoY, while the operating profit grew by 39% YoY resulting in a sharp 119-basis point (BPS) margin expansion. Led by a healthy operating performance, the net earnings saw a Y-o-Y turnaround from a marginal loss of Rs1 lakh in Q1FY2015 to a profit of Rs1.33 crore in Q1FY2016.

Ethos posts a strong show: Ethos (80% subsidiary) posted a 25.5% top-line growth on the back of a strong 16% same-store sales growth. Its contribution from the online channel continues to improve and for the current quarter, the online sales constituted around 29% of the total revenue. Asset light model for the online presence brings operating leverage, which has led to a strong margin expansion in the business (+170-BPS margin expansion; over 2x growth in the operating profit).

Management remains upbeat on the prospects: The management continues to nurture its online platform for the luxury watch retailing business (Ethos), which is expected to deliver over 25-30% top-line growth for the next two to three years, along with a margin expansion. The manufacturing business is likely to grow at a steady pace of 6-8% in the near term.
wMoney raised for expansion at Ethos: In July, the company had raised Rs30 crore by issuing shares to private equity players like SAIF India, at an issue price of Rs297.5 per share, resulting in a 10% dilution. The money raised would be utilised for expanding the back-end infrastructure and strengthening the supply chain of Ethos.

Maintain Buy with PT of 375: The growth momentum and the margin expansion trend in the Ethos business is panning in line with our expectation. Thus, we continue to like Ethos' unique high-end watch retailing business, which is expected to grow manifold by cashing in on the growth in the luxury watch segment and the increasing trend towards online e-tailing. Thus, we believe that KDDL is available at reasonable valuations to play on the fast-growing online niche luxury play that would witness valuation re-rating as results unfold. Hence, we maintain our Buy rating on the stock with an unchanged price target of Rs375 (valued at 6x its FY2017E earnings for the stand-alone business + 1.1x its FY2017E sales of Ethos).

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